Ireland’s Fragile Economic Success

Ireland’s indigenous exports have grown negligibly over the past decade.  In contrast industrial exports of US firms in Ireland have boomed and now represent some 80 percent of the total. Were US firms to drift abroad during the coming years Ireland would rejoin the ranks of Europe’s most impoverished nations. Ireland is deeply indebted to the creative and entrepreneurial skills derived from the US and consequently much dependent on the potential vagaries of US corporate and government policy.

Ireland and Finland are frequently mentioned in the same breath as European success stories. Yet there is a significant difference. Finland’s growth has been based on strong indigenous foundations: based on Finnish high-tech firms that are research-driven and export-oriented. Moves to more sophisticated knowledge-driven enterprise are supported by intense investment in human capital and especially in Finland’s universities and research institutions. The Finnish state has played a key role in supporting private enterprise by creating a framework that has woven together fiscal, educational and enterprise policies into a remarkably robust and well coordinated system with its apex in the prime minister’s office. While the Finnish success story is precarious too, and greatly dependent on its most successful indigenous enterprise, Nokia, it is robust when compared with Ireland. During the past decades Finland has built a high-tech knowledge-driven indigenous enterprise base that is relatively immune to the whimsy of Washington, Brussels or the evolving preferences of multinationals.

The same can not be said for Ireland. Our indigenous enterprise is weak and lacking in research, innovation and marketing capabilities. Increasing labour costs and more intrusive regulation combine to weaken the perception of Ireland’s competitive position; making it less attractive than alternative locations in central Europe or Asia.

Indigenous firms, such as Waterford Glass, that depend primarily on manual skill, rather than advanced knowledge, find it increasingly difficult to prosper in Ireland. Such firms have stark choices: either close or transfer operations to lower-cost and less regulated locations where they can once more be profitable.

This erosion of labour intensive enterprise would be less disturbing if Ireland could confidently expect to remain as a choice location for mobile foreign direct investment. There was every reason to hope that this might be so in the 90s, as every region in Ireland benefited from the influx of new start-ups. While the remarkable work of Irish development agencies continues to maintain a pipeline of new investment there was a drop of over €10 billion in foreign direct investment in 2004 and the multinationals employ 12,000 fewer people than they did in 2000. The less developed regions, lacking urban scale, advanced expertise and infrastructure, struggle to secure new investment to fill the void created by labour-intensive enterprise that is forced to close or move abroad. Dublin, the centre in Ireland large enough to offer the infrastructure and services knowledge­-driven enterprise demands, expand rapidly.

The Irish economy appears healthy.  However in recent years public expenditure on infrastructure, public sector job-creation and the mad domestic housing bubble have been the prime drivers of growth. The buoyant economy created by these activities masks Ireland’s increasing loss of competitiveness and the growing challenges experienced by the productive sector during the past five years.

At a time when economic indicators appear so positive it is difficult for those in government to find reason to tackle the underlying longer-term issues. Our unreformed electoral system, now shared only with Malta, results in a distorted orientation towards short-term and parochial issues, and discourages the consideration of global threats that threaten future national wellbeing. These threats are all the more dangerous because they are cloaked by the unhealthy economic buoyancy associated with public expenditure and the housing bubble.

What should be done? A lot. But two areas are of prime importance: reasserting Ireland’s pro-enterprise disposition and transforming the Irish educational system to meet the demands of the evolving knowledge society.

The government’s admirably strong commitment to low corporate taxation and its determination to retain this in the face of pressure from Brussels is clearly evident. However there is less clarity about the government’s attitude towards corporate policy in two areas that are of much interest to mobile international investment: corporate regulation and human resource regulation. Proposals to introduce corporate regulation more intrusive than the harsh US Sarbanes-Oxley were not helpful to international perceptions of Ireland’s evolving enterprise policy. Doubts were raised in corporate boardrooms as to whether members could even continue to serve on the boards of their Irish subsidiary companies should the proposals become law.

In parallel with this, recent concessions to union organisations encourage the view from the US that Ireland’s policies towards enterprise are drifting in unhelpful ways. The steady decline in union membership in Ireland for the past decade can be attributed primarily to the enviable terms and working conditions generally enjoyed by employees of multinationals. Union membership is now predominantly associated with public sector employment. To counter problems of dwindling membership, unions have successfully extracted concessions from government extending their power to organise within non-unionised enterprise. These concessions threaten to undermine Ireland’s successful industrial relations framework and are especially threatening to the multinationals that produce over 80 percent of what we export.

The apparent drift in government enterprise policy, combined with socialist declarations by its leadership, are unlikely to be found encouraging in multinational boardrooms attempting to grapple with Ireland’s escalating cost-base. Taken altogether they combine to damage Ireland’s reputation and add yet other incentives to Irish-based firms to explore the increasingly attraction options offered by central European or Asian locations.

Nor can the declining competitive position of Ireland’s universities encourage leaders of knowledge-driven enterprise to view Ireland favourably. While major investment is now being made by government in rebuilding university research capability; the exercise is undermined by reductions in their education budget. Indeed while research budgets have been growing rapidly university core budgets have been cut in real terms by 42 percent since fees were abolished in 1995. This inconsistency of policy is difficult to explain in rational terms and presents unusual challenges to university leadership. The refusal of government to consider implementing the specific OECD recommendations designed to address the financial predicament of the universities raises doubts about commitment to university excellence and investment in human capital: the key asset upon which Ireland’s economic future must be built.

The countries with whom Ireland competes recognise that competition in the knowledge age is a race for talent and are moving to restructure and increase investment in education and particularly in their universities. The poor showing of Germany’s universities in recent international ranking tables has stimulated the government to allocate major funding in order to creating nine elite universities. Singapore is undertaking a major overhaul of its whole educational system so that it is reoriented to the new needs of the knowledge-driven economy. Finland has grown and prospered in recent decades though its tightly integrated education and enterprise policies and the redirection of resources designed to make its education and research system a world leader. Sweden and Denmark have similar strategies.

The fruits of Ireland’s remarkable past success create problems that threaten its future prospects. To counter these trends a variety of initiatives are called for. In particular government must unambiguously reaffirm Ireland’s pro-enterprise policies. It must also take aggressive action towards implementing the dormant educational recommendations designed to ensure that Ireland’s human talent will continue to compete with the best in the evolving global economy.

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